June 28, 2021

Today's newsletter is 1,089 words, 4 minutes.

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1 big thing: The show must go on!

Illustration: Sarah Grillo/Axios

I’m Sam, the new guy.

Why it matters: People want to understand what’s driving the markets, and Axios serves many of those folks with this newsletter.

  • Writers come and go. But the demand for helpful insights and fresh perspectives persists.

And so, here I am.

Background: I come from Yahoo Finance. Before that, Business Insider. And sometime before that, I earned a CFA charter while working for Forbes Newsletters.

The big picture: I follow a lot of things. But there are some things I've been obsessing over.

  1. The U.S. stock market: It’s been going up for a hundred years. Lots of horrible things have happened during that period, but not so horrible that it’s kept the market down. That probably won’t change.
  2. Expected earnings: From an investor’s perspective, anything you can ever learn about a company matters only if it tells you something about future earnings.
  3. Quit rates: Quitting is one of the more visceral manifestations of money colliding with emotions. The level of quits across the economy, an industry, or even a specific company reveals everything.
  4. Long-term interest rates: For 15 years, I've kinda thought rates might start rising. But I can't explain why. It sorta makes sense why they might not change, but I can't really explain why they should rise.
  5. The VIX: Actually, ignore this. Aka the volatility index, the VIX helps explain option pricing. But people bring it up when the stock market sells off as if it adds anything to the conversation. I've got my eye out for overrated indicators like this.

What’s next: I’m going to read a lot of news, look at a lot of numbers, talk to lots of smart people, thumb through mountains of research, and collaborate with the brilliant Axios newsroom to get you the best information and exclusive insights. Using Smart Brevity®!

  • For more real-time content, follow me on Twitter: @SamRo.
  • Questions? Comments? Unique takes? Email me at [email protected].
  • I'm usually up and online by 4:30am ET.

The bottom line: I’m here to serve you. So, tell me what I can do better.

2. Catch up quick

Johnson & Johnson will pay $260 million to settle claims that it fueled an opioid epidemic in New York. (Axios)

Cryptocurrency exchange Binance has been banned from operating in Britain. (Reuters)

Larry Summers and other top economists aren't worried the bipartisan infrastructure proposal will boost inflation. (Axios)

Boston Fed president Eric Rosengren warned the U.S. cannot afford a housing "boom and bust," saying the Fed could stop purchasing mortgage-backed securities before it stopped purchasing Treasuries. (FT)

3. This could be peak inflation

Data: BEA via FRED Chart: Axios Visuals

The core PCE price index in May was increasing at the highest yearly rate since 1992. But this may be the top, Axios business reporter Hope King writes.

Why it matters: Core PCE, which was updated Friday, is the Federal Reserve's preferred measure of inflation. High inflation means your money is worth less, and it could force the Fed to tighten its easy monetary policy.

By the numbers: Core PCE rose to 3.4% in May from 3.1% in April.

  • It's currently above the Fed's target of an average 2% rate.

Yes, but: Core PCE rose by 0.5% on a monthly basis in May and down from 0.7% in April, suggesting price inflation may be decelerating.

  • And the Fed has argued elevated inflation has been driven by "temporary" factors like the low base effect from last year's drop-off due to the pandemic.

What they’re saying: "This should be the peak," according to a note from Pantheon Macroeconomics' Ian Shepherdson.

  • "The key question for the Fed ... is whether the spike in core inflation raises inflation expectations and whether employees have the power to translate higher inflation expectations into faster wage growth," he added.
  • Oxford Economics' Gregory Daco writes in a note that while he foresees "increased inflation stickiness, with core PCE inflation hovering around 3%" in the second half of the year, "we don’t foresee runaway inflation."

What to watch: The latest readings precede the summer months, where consumers are expected to spend more on services as they head out for vacation and trips — representing a much different stage of reopening not captured in May's data.

4. A $2.4 trillion "unpredictable" bullish force

Data: Bureau of Economic Analysis; Chart: Axios Visuals

Americans with limited options to spend during the pandemic saved more than usual. And while it’s unclear how this money will be spent, everyone agrees this is awesome for the economy.

Why it matters: Wells Fargo estimates $2.4 trillion in excess savings has been accumulated by consumers since the beginning of the pandemic. And consumer spending accounts for about 68% of GDP.

What they’re saying: "The savings are enormous," Wells Fargo’s Tim Quinlan tells Axios.

  • "This is equivalent to 15-20% of typical annual consumption and is an ample amount of dry powder consumers are able to tap as the economy re-opens," he adds.
  • How these savings will be deployed is "unpredictable," but they'll likely have a big impact on consumer spending "over the next couple years," Pantheon Macro’s Shepherdson said in a research note.

Yes, but: Quinlan notes that excess savings estimates don’t account for how much was used for things like paying off student loans, paying down a mortgage, or financing a brokerage account.

  • Commonwealth Financial Network’s Anu Gaggar tells Axios, "Lower income households could quickly run down their savings once additional stimulus payments are halted and rent and mortgage payment moratoriums are lifted."
  • "On the other hand, savings of higher income households could be stickier as they have lower marginal propensities to consume," she said.

But, but, but: "They still put households on better financial footing and therefore can support spending growth," Quinlan added.

  • Similarly, Shepherdson estimates that if households spent just 15% of these savings over the next two years, it would provide a 0.8% boost to GDP per year.

The big picture: The economy faces all sorts of shortages as growth heats up, which is boosting inflation. But the fact that consumers are still piling up savings speaks to how much demand continues to eclipse supply.

5. Republicans and Democrats see different recoveries

Consumer sentiment by political party
Data: University of Michigan; Chart: Connor Rothschild/Axios

Consumer sentiment is trending higher for Democrats, while tumbling for Republicans, according to survey data released Friday by the University of Michigan.

Why it matters: Economic conditions have trended higher nationally, but only half feel good about it.

What they’re saying: "It is yet another sign of the depth of political polarization that is, if anything, becoming more entrenched," ING economist James Knightley tells Axios.

  • "If a booming economy that is creating jobs and wealth can’t be recognized across the divide, then I’m not sure what else can. We are going to have to brace for a very long period of political strife."